Randy Cray column: Explaining the Federal Reserve System

Randy Cray

The Federal Reserve System, or "Fed," seems to always be in the news. You can hardly turn on a television channel devoted to business and economic news without the Fed being mentioned. My experience on the matter suggests that only a few people really know much about this very important institution. In this month's column, I will try to shed some light on our nation's central bank.

The Federal Reserve System Act was passed by the United States Congress in 1913. The act was passed in response to the financial panic in 1907. Historically, the U.S. economy experienced many periods of financial instability. The financial panic in 1907 was the catalyst to finally cause the Congress to deal with the situation and create the Fed.

This new institution would be in charge of our money supply and be a major regulator of our banking system. The hope was that the creation of the Fed would reduce economic volatility.

Let's be clear - reducing economic volatility does not mean the elimination of the business cycle. Case in point, the recent economic downturn was centered in our nation's financial institutions. However, the vast majority of economists believe that without the Fed's strong intervention, the Great Recession would have turned into the second Great Depression.

The Federal Reserve System is headquartered in Washington, D.C. In addition, there are 12 Federal Reserve district banks and twenty-five branch banks. The district banks and their branches are spread out across the U.S. In Wisconsin, all but the northwest quadrant of the state is part of the Seventh Federal Reserve District of Chicago.

The Federal Reserve System's Board of Governors oversees the operation of the Fed from Washington. There are seven members on the BOG. Each is nominated by the president of the U.S. and confirmed by the U.S. Senate. A governor can only serve one 14-year term. The terms are staggered so that under normal circumstances, a vacancy opens up every two years. The length of the term and the staggering of the appointments were done to insulate the Fed from political pressure.

The chairperson of the Fed is a member of the BOG. The chairperson is nominated by the president and confirmed by the Senate for a term of four years and can be reappointed. However, under normal circumstances, they can only serve a total of fourteen years. The current Fed chairman is Ben Bernanke, and his appointment will end in early 2014. The rumor in Washington is that Bernanke will not seek another term as chairman and will leave the BOG.

Another important body in the Fed's organizational structure is the Federal Open Market Committee. The FOMC is comprised of the seven BOG members, and on a rotating basis, five of the seven Federal Reserve District Bank presidents. This committee has a formal meeting in Washington about every 45 days to discuss economic conditions in the nation. The FOMC decides how much money to add or take away from the economy, the level of interest rates and other matters pertaining to the nation's economy.

As mentioned earlier, the Congress in 1913, with bipartisan support, wanted to insulate the Fed from political pressure. They thought that monetary policy was too important to be left in the hands of politicians. Along those lines, the Fed is the only government agency that does not have to ask Congress for a budgetary allocation to run its operations. This gives the Fed great independence to pursue the policies it feels are in the best long term interest of the nation. Where does the Fed get the money to run its operations? The Fed's ability to create money allows it to buy U.S. Treasury securities and the interest on those securities provides its operation revenue.

Over the course of time, the Fed has been given a number of important duties. It is responsible for creating and managing our nation's money supply. In doing so, it has a large impact on interest rates, and the general level of liquidity available to households and businesses. The Fed also is a major regulator of our country's financial institutions. It also serves the nation as a lender of last resort to troubled financial institutions. Lastly, the Fed serves as a major clearinghouse for checks and hence the flow of funds in the U.S.

ADVERTISEMENT

ADVERTISEMENT

ADVERTISEMENT

Email this article

Randy Cray column: Explaining the Federal Reserve System

The Federal Reserve System, or 'Fed,' seems to always be in the news. You can hardly turn on a television channel devoted to business and economic news without the Fed being mentioned.

A link to this page will be included in your message.

Join Our Team!

If you are interested in working for an innovative media company, you can learn more by visiting: